What kind of returns to expect from the market

At Toastmasters with my friends. Jan 3rd

Financial gurus make their money from selling programs

Last week a few of my friends invited me to a 3 day seminar on how to become rich trading stocks.

I have seen these amazing marketing campaign before. A guru is going to teach the secret formula. All you have to do is pay $999 and you will the key to wealth. You will go to your computer and a torrent of cash will be spited out of your screen.

Spoiler alert! Anyone with a trading advantage, will keep it to himself, he will not be traveling from city to city in order to sell it for $999.

In the 1960, professor Edward O. Thorp, discovered in a formula to trade options. Instead of revealing his formula, he kept it secret. Today, the professor is worth about 800 million.

How much can a regular investor expect from the market?

We can only look at the past and conclude that if the future will have any resemblance to the past, we can expect about 8% to 9% return.

However,

What the market gives and what investors get are two different things. Investors tend to under perform the market by a wide margin.

When we talk about the market, we generally think of the S&P 500 (in the States) or the TSX 300 (in Canada), so the question is: How much can a regular individual expect from the market.

According to a research done by DALBAR’s Quantitative Analysis of Investor Behavior (QAIB), investors have been earning 2.5% while the market has been earning about 8%.

How is this possible? The reason is that  investors buy and sell at the wrong time. Sell when stocks are cheap and buy when storks are expensive. People tend to buy stocks when the see that stocks have been going up for a while, by this time they will catch only a small part of the uptrend. Investor tend to sell stocks when stocks have been declining for quite some time, by this time, they will be getting out too late.

How do we fix this problem?

The best thing to do is to do nothing. If you buy the S&P 500 or the TSX 300 and you ride the ups and down of the market, on the long run you will do quite well.

This is very difficult to do because we are exposed to the media and to the noise. The media is there, not to help investors, but to sell advertisement. In order to draw attention the media tend to prioritize catastrophic events. This makes investors nervous and they sell.

How to beat the market

Let’s say that you buy stocks once a month. Let’s say you invest $1,000 on the first of every month. With this simple rule, when the stocks are cheap, you can buy more stocks and when the stocks are expensive, you can buy less. The cumulative effect of this strategy will help you earn more than the market.

Coaching services

I am a money coach, don’t hesitate to write me if you want to talk about money or anything else that is going on in your life.

One thought on “What kind of returns to expect from the market

Leave a Reply